Shares of Clorox (CLX 0.69%) are down 7.4% since it reported earnings on Feb. 3. The consumer goods company continues to make big changes it hopes can chart a path toward margin expansion. Clorox has come a long way in the last few years, but many of its investments have yet to translate to bottom-line results.
Here are three reasons patient investors should consider buying and holding the high-yield dividend stock over the long term.
Image source: Getty Images.
1. A strong portfolio of brands with room to run
Clorox has a diverse lineup of brands spanning several everyday-use household goods categories, including:
- Staple cleaning products, like bleach and Clorox wipes
- Glad bags and wraps
- Cat litter
- Hidden Valley Ranch
- Kingsford charcoal
- Personal care products, like Burt's Bees
- Filtration brands, like Brita
The company's diversification helps smooth out slowdowns in different end markets but can also make the business less focused. Too much diversification can also make it difficult to allocate marketing and advertising across so many different brands.
Clorox is addressing efficiency challenges by optimizing its internal operations through a multi-year effort. Initially announced in August 2021, the improvements are estimated to cost a whopping $560 million to $580 million.
Additionally, Clorox is spending around 11-11.5 cents for every dollar in sales on advertising and promotions to lean into its best-selling products and drive margin improvements. The company has gradually increased its advertising and promotion spend relative to sales.
The ratio of ad and promo spending to sales will probably continue to rise now that Clorox has completed the sell-off of its Vitamins, Minerals, and Supplements business and divested out of lower-margin regions with significant foreign exchange risk, including Argentina, Uruguay, and Paraguay.
On the earnings call, Clorox CEO Linda Rendle doubled down on the need to support existing products with advertising -- especially new product launches. Rendle said the following on the earnings call:
And I'd just emphasize, we continue to invest strongly in our brands. We increased our percent of sales against advertising and sales promotion this year, and we did that intentionally to remind them of the value.
Clorox expects even more advertising in the second half of fiscal 2025 compared to the first half as it invests in innovation and new products. For example, it is launching a heavy-duty litter product that it will support with ad spending. Clorox's aggressive advertising and promotion spending, even during a period of added expenses and divestments, shows that the company has conviction in its brand portfolio and new product launches.
NYSE: CLX
Key Data Points
2. A reasonable valuation
Clorox's valuation has been all over the place in recent years as the company has accounted for impairment charges, the cost of efficiency improvements, divestitures, and more. Therefore, it's better to look at Clorox's adjusted earnings, revenue growth, gross margins, and operating margins until the state of the business normalizes.
In the recent earnings release, Clorox increased guidance for its fiscal 2025 (ending June 30) to a range of $6.95 to $7.35, while its diluted earnings per share (EPS) is expected to be between $5.52 and $5.92. Based on those projections and a share price of about $147 at the time of this writing, Clorox has a price-to-earnings (P/E) ratio of 25.7 and an adjusted P/E of 20.6.
That's not dirt cheap for a low-growth company. But it's also worth keeping in mind that Clorox is still in a turnaround and has to adapt to major changes in its internal processes and restructurings.
The good news is that the most difficult period of the turnaround is likely complete. After a plunge in demand, inflation and supply chain issues, and internal challenges, the company has finally restored gross margins to pre-pandemic levels.
If the company can carry its momentum forward, Clorox could quickly look like an even better value, especially if the stock price languishes. In the meantime, the dividend gives investors a sizable incentive to hold the stock.
3. A stable and growing payout
Clorox has paid and raised its dividend for 40 consecutive years, providing assurance that investors can rely on its quarterly payout for passive income or even supplement retirement income. Recent dividend increases have been fairly small, but that's understandable, given the company's turnaround.
CLX Dividend data by YCharts.
As you can see in the chart, Clorox's dividend yield of 3.3% is at the high end of the range over the last 20 years. This makes sense, given the consistent raises and that the stock price is down over 10% in the last five years.
Clorox is a buy for income investors
It's been a challenging period for Clorox investors as the company saw margins plummet post-pandemic. The restructurings and long-term investments in improving internal processes should help Clorox become a higher-quality company at the expense of its near-term results.
Given the turnaround timeline, some investors may prefer to keep Clorox on a watchlist until the company reaches a steadier state. However, the dividend yield is solid, so investors who value passive income may want to simply scoop up shares now, sit back, and give the long-term investments time to translate to stronger financial results.
